Wednesday, February 13, 2013

Another Big NY Firm Jettisons Trusts and Estates

Corporate law firms once viewed trusts and estates as a small yet important practice that discreetly advised wealthy families. But drafting wills and trusts, and the legal matters that flow from that, is less lucrative than the primary revenue drivers at big law firms: multibillion-dollar corporate transactions and high-stakes litigation.

And there are problems with trusts and estates within a big law firm model. The practice, to use the law firm management parlance, is not as leverageable as other areas. Corporate and litigation partners generate big fees by assigning armies of junior lawyers to megamergers and complex lawsuits. By comparison, trusts and estates work requires far less manpower, which mean far less profit.

Another issue in sustaining these departments is that individual clients bristle at billable rates that now reach more than $1,000 an hour. While big corporations grudgingly pay those rates, wealthy families often resist them.

As a result of these dynamics, firms’ trusts and estates practices have remained small and, in many cases, decreased. At the same time, firms have aggressively built up their corporate and litigation practices across the globe. They have also embraced hot, moneymaking practice areas like patent law and white-collar criminal defense.

-from "Debevoise & Plimpton Drops its Trusts and Estates Practice,"  in the Feb. 5 New York Times.

The process of large law firms pushing out their trusts and estates practices has been going for 20 years or more.  Perhaps a key factor in this particular situation is a lock-step compensation system for senior partners.  It has always seemed to me, however, that the big firms could simply pay the T&E lawyers less, unless the overhead structure is so burdensome in the big firm that the T&E lawyers would do better in a small firm setting.  That is an argument that I hear from T&E lawyers who would prefer to practice in boutique firms and not to join a larger firm with a diverse practice. 

We get several inquiries a year from large firms seeking a merger.  Haven't bitten yet.

Thursday, February 07, 2013

Top Schools Suing Grad Students Who Default on Perkins Loans

The Russians report the story this way:

Graduate student borrowers are defaulting on almost US$1 billion in federal loans that were given out to the poor. US colleges such as Yale, Penn State and George Washington are coming after them in the courts, suing for nonpayment.

-from "Wealthiest US Colleges Suing Students over Default loans" from the RT website.

Bloomberg reports it this way:

Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University and the University of Pennsylvania with little choice except to sue their graduates.

From "Yale Suing Former Students Shows Crisis in Loans to Poor" from the Bloomberg News Website.

The government is holding the schools accountable that admitted the subject students in the first place. Those subsidies increased the demand for the grad school's education.  Increased demand meant higher fees and expenses could be charged by the schools, which meant the students needed to borrow further, a malignant cycle, no?  Now the schools sue the former students.  We trust that prospective students are much more wary.

I have to question Bloomberg's assertion that the schools have "little choice except to sue their graduates," especially the top ones, with huge endowments, vast fixed assets, and prosperous alumni.  They could start paying the government back right now and not wait on how their lawsuits turn out.  But perhaps they are.

Surely some of the grad students, especially the ones who can't find jobs, will countersue the schools, alleging misrepresentation about the status of the jobs market and a failure on the part of the school to determine whether the student would be able to pay back the school before admitting the student in the first place.

I would be interested in how many suits the government has against the schools.  Probably none at this point.  It ought to happen.

In any event, this probably indicates that government subsidies of higher education generally are at serious risk. In fact, the articles state that this is the case. The higher-education bubble that Glenn Reynolds describes continues its slow motion burst.  It would seem to me the entire business model of the university is experiencing a "creative destruction" wave of the sort that other business and social sectors have experienced.  It's time.